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Go West, Young Man!

Horace Greeley is often credited with a famous quote actually made by John B. L. Soule. The quote first appeared as the title to the 1851, Terre Haute Express editorial written by Mr. Soule. Along with being wrongly credited to Mr. Greeley, it has also often been misquoted. It was originally written as:

"Go West, young man, and grow up with the country."

Even though Horace Greeley was not the author of this famous quote, which he partially used in his own 1865 editorial, he was nevertheless an important contributor to history. He launched the New York Tribune in 1841 and used it as a personal platform for advancing his political views. In one of his other more famous editorials, penned during the Civil War and titled, “The Prayer of Twenty Millions”, he demanded slave emancipation earning him a personal reply from Abraham Lincoln in August of 1862. Greeley was a Republican who hired Karl Marx as his European correspondent during the1850’s. He was an advocate of western settlement as well the voice for many social causes including labor rights.

Westward Expansion

Our expansion westward was an exciting time in history. There was opportunity and adventure to be had for the young, unattached men of the time. There was also a great need for able bodied young men to help this young country forge a path through the wilderness of the untamed West. So, in great numbers they went West to build another pillar in the foundation upon which our great nation now stands.

The problem is that nobody ever told us to stop that western migration. While there was a period of delay and consolidation, we’ve now continued West by ship and plane. As a matter of fact, we’ve gone so far West that we ended up in the Far East. While trade with China dates back over 200 years, the recent history of trade begins with President Richard Nixon's historic visit in 1972. It started as an innocent diplomatic mission to actively engage an isolationist nation through trade, but has grown into a wholesale exportation of our manufacturing capability and jobs.

I must admit that I’ve had suspicions for sometime. These suspicions revolve around the Fed’s claim that our productivity growth has been one of the primary reasons for our economic recovery. Yet, when you look back throughout history, every recession was followed by a strong rebound in employment, except one---this one. This recovery has been characterized by sluggish employment revitalization with many of the re-employed earning much less and without benefits. This has been broadly rationalized away in the name of our miraculous, new found productivity paradigm.

I believe this claim is false

We’ve experienced a period of prolonged growth and expansion beginning with our entry into World War II. Since 1947, our Gross Domestic Product (GDP) has grown by 570%. The chart below shows our recent GDP along with the Trade Balance of Goods (1992-2003). GDP grew by 45% while the Trade Balance experienced nearly 450%negative growth (year over year) relative to 1992. This Trade “Imbalance” (more appropriately) grew 10 times faster than the GDP and comprised 5% of our total 2003 GDP.

Did we import our growth?

I see at least two possible scenarios in light of the rising GDP. First, our production capacity was humming along at nearly 100% and we were unable to supply our requisite demand, so we were forced to import more than we export. Or second, our capacity was stable or shrinking and we imported a disproportionate amount to fuel the GDP growth because it was cheaper and more profitable to do so.

Before I continue, let me say that these are government numbers. They can be molded and shaped to present the view that the “Puppet masters” desire. An example of this is the recent unemployment numbers. The December Unemployment Rate dropped from 5.9% to 5.7% on a total gain of only 1,000 jobs because 309,000 people quit looking. Now that’s distorted! The problem is that absent any viable and widely accepted alternative, we’ll have to live within the framework they provide. My intention is not to tear apart the construction of their statistics, but rather to show you growing imbalances while playing their game using their numbers.

Since the Trade Balance is the difference between exports and imports, it stands to reason that excess imports should be easily explained with one of the scenarios described above. First, let’s see how good we were at producing.

Industrial Production (+49%) roughly matched GDP growth (+45%) over the same period from 1992-2003 as shown in the charts above. The difference occurred from 1999 through present, where Industrial Production suffered a distinct flattening. I went back to look at GDP for that period and found that it grew 16.3% from 1999 to present while Industrial Production only grew 6.5% (relative to a 1992 baseline). I also noticed the Trade Imbalance accelerated at the same time with 65% of the -$3.458 trillion occurring in the last 5 years.

I had to stop here, because it’s obvious. -$3.458 trillion in 12 years! We imported our growth!

What were we thinking? And, who’s going to pay for this?

Sorry, I had to vent ……….but, I discovered more……..now, while the Industrial Production index was flattening, we increased our Trade Imbalance to sustain the GDP growth. Remember, this began during the final leg up to the top of the tech bubble where euphoria was rampant and we were awash in money. Later, in the bubble aftermath and ensuing recession, the Fed left the liquidity floodgates wide open in an effort to raise our sinking economic boat. This promoted over consumption pushing up the Trade Imbalance to an average 4.5% GDP per year over the last 5 years. Those excess Imports accounted for more than we’re used to seeing for normal annual GDP growth. Again, it’s obvious that we grew through Imports. (I know this is difficult and tedious, but hang with me here!)

Was our Efficiency expanding, stable, or contracting?

When I say, “Efficiency”, I’m talking about how good we were at producing “things” in our available factories. This chart shows our factory Capacity Utilizationcontracted by 7.8% while Production expanded by 6.5% from 1999 through the present. In other words, we were getting a lot more efficient by producing more, in fewer factories. For the utilization to drop as it did, factories had to be idled at such a rate that they diluted the rising production of the operating factories while we continued supplementing production through imports. These numbers are apples and oranges to some degree; regardless, as production moves one way and capacity moves the other way, the spread looks like 14.3% more “orange colored, Efficiency apples” to me.

Now for the kicker, factory Capacity Utilization is a measure of current capacity and is just like the Unemployment Rate. As factories are shuttered, they are removed from the equation just as the 309,000 workers who quit looking for work were removed from the Unemployment Rate calculations. It’s fluid, and there’s no telling how many more factories have empty parking lots with weeds sadly growing up through the cracks, but it’s easy to see there was significant contraction post 1999.

So, how were we able to become this efficient? Did our workers become that much more productive?

This chart suggests our workers became enormously more productive as Manufacturing Output per worker increased by a whopping 20%! This happened while the Unemployment Rate increased by a massive 32% as we lost2,899,000 total manufacturing jobs. (Whew, we’re through the hard part!)

Simply stated, our vast Efficiency gains were achieved because we made a whole lot more “things”, with a whole lot less people, and did it with fewer factories.

I’m sorry, but that’s crazy!

I can buy the fact that our workers are the most productive in the World. However, if efficiencies like this were achievable now, then why weren’t at least some of these efficiencies in place long ago? We should be seeing small “blood out of a turnip” type efficiency gains, rather than these gargantuan, double digit, compounded gains across the full spectrum over 5 short years. If you buy the argument that our workers are the most productive, as I do, then you can’t turn around and say that there was this much “fat” pre-existing in our manufacturing sector. Mobs of vigilante shareholders would form posses and hunt down any management teams allowing these broad inefficiencies to erode profits. Also, did all the Wall Street analysts have a simple case of self-induced myopia or was it really an advanced case of glaucoma? It doesn’t make sense and I don’t believe it.

So, how did we do it?

I say again, “We were flooded with imports!”

An increasing percentage of imports are coming from China where 2003 GDP grew by 9.1% on an 18% increase in Industrial Production fueling the creation of 8.5 millionnew jobs. In my opinion, the reason we have such enormous productivity gains, while utilizing fewer factories, is because we are slowly becoming nothing more than the final assembly or distribution point for many components manufactured in China and other countries abroad. We snap the pieces together like LEGOs® and lay claim to the full unit production. If 20% of the components are now produced abroad, we snap them together and claim 100% of the productivity while actually only producing 80% of the end product.

The amazing thing is that embedded in the bloated government “numbers”, the “Puppet masters” actually claim credit for the production accomplished by the Chinese and others while touting the mega-advances in our productivity. Alan Greenspan said in his speech at the Securities Industry Association annual meeting in Boca Raton, Florida on November 6, 2003, “The combination of growing output and falling hours worked was made possible by a startlingly large rise in productivity.”

He was startled?

I’m startled that the Fed Chairman could have this so completely backwards! As we discussed above, that “growing output” is coming from fewer workers, producing more, in less total “hours” resulting in the “large rise in productivity”, not vice versa. You can’t have the productivity cart full before the worker horse is out of the barn! Workers must actually show up to work and produce “things” before you can measure their output per hour and hence, their productivity. Regardless, that “large rise” is not coming solely from direct internal productivity gains anymore. Those internal efficiencies were squeezed out of the system long ago. They’re external now.

For a smaller example, let’s say you produce refrigerators where it takes 10 workers to produce the door and hang it. To compete, you must reduce production costs. So, you decide to buy your doors in China and eliminate all those workers except the one door hanger. After receiving your Chinese doors, your door hanger snaps the hinges in place and you claim credit for 1 refrigerator produced with 9 fewer employees.

This is the external combination they’re using to show the extraordinary rise in total Industrial Production while requiring less factory Capacity Utilization. Combined, they create a false increase in our Productivity growth making this “Jobless Recovery” an easy sell to the gullible public!

Alan Greenspan worships at the altar of Productivity to shroud his interest rate and fiat money policies. In this recent speech, he went on to offer 3 different hypotheses, “One hypothesis is that some of the increase represents a temporary rise in the level of productivity….”

I would have to say this job shift is looking pretty permanent as it’s very hard to pry open the rusted factory shutters and retrain whole classes of skilled workers. The artificial “Strong Dollar Policy” has encouraged the Walton Dynasty to build the “Great Wall”mart at the expense of our manufacturing capacity and capability as well as countless “Mom and Pop” retailers.

He went on to suggest, “Another hypothesis is that the level of productivity has undergone a one-time permanent upward shift. This hypothesis builds on the idea that the heavy emphasis on exploiting new and expanding markets from 1995 to 2000 likely diverted some corporate management from the hard work of controlling costs.”

I have to agree, there’s no more productivity left to be squeezed out of the American workers that still have jobs. Those that don’t are feeling pretty much “exploited” as their jobs were moved into the “expanding” Chinese market. If we were somehow able to bring back the tens of thousands of jobs that produced towels, linens, clothing, and shoes---all low productivity/low dollar value goods---our Productivity numbers would actually go down. Would those workers that lost their jobs be upset by that? Sadly, using Greenspan’s logic this would be a bad thing, because only the Productivity numbersmatter. Those displaced workers lucky enough to find new jobs are working for much lower wages and benefits; and, then there’s the 309,000 that recently just gave up. Does that mean they no longer exist?

Regarding cost controls, I think many sectors may have already cut through the muscle and into bone as they come dangerously close to causing a deflationary backlash as everyone gets squeezed. That backlash, if it occurs, could arguably be caused by the very policies that Greenspan employed to avoid deflation in the first place. Now, wouldn’t that be ironic?

Greenspan completes the hypothesis smorgasbord by saying, “Finally, yet another hypothesis stresses a more-lasting increase in the growth of output per hour.”

Alan Greenspan sure has a lot of hypotheses and I wish he would pick one. Okay, which of the three hypotheses is it……..temporary, one-time permanent, or more-lasting?I say it’s behind door number three, more-lasting. As long as they continue to shift jobs abroad, while taking loan for the out-sourced component production, it’s likely to last a long time. In that case, we can get back to producing more of his favorites: consumption, fiat paper, and debt. The game ends when the music stops and the net-Exporters can’t see over their arm loads of worthless fiat paper to realize we took all the chairs that they made and went home.

I think my suspicions are confirmed. Just as Horace Greeley was wrongly credited for his misquoted use of ’John B. L. Soules famous editorial title, we’ve been wrongly credited with productivity gains accomplished by the Chinese and others through the government’s use of misquoted production numbers. The ironic thing about all this is that Horace Greeley, the labor rights advocate, would be appalled on multiple counts, while his employee, Comrade Karl Marx, would be proud!

The good news is if we keep going West, we’ll eventually land on our own East coast.